Goldman’s ABACUS 2007-AC1: The whole truth and nothing but the inconvenient truth!
But the whole truth and nothing but the truth would in the case of ABACUS 2007-AC1 have to include the following facts, no matter how politically or agenda inconvenient they might be:
IKB, a commercial bank headquartered in Germany did not use $150 million to lend to small and medium sized German companies, as they historically had done, but instead invested and lost “$50 million in Class A-1 notes at face value” and “$100 million in Class A-2 Notes at face value” in ABACUS 2007-AC1, exclusively because of the following two reasons:
First both tranches, the A1 paying Libor plus 85 basis points, and the A-2 paying Libor plus 110 basis, points were rated Aaa by Moody’s and AAA by S&P when purchased by IKB.
Second, in order to invest $150 million in these securities which because of their ratings were risk-weighted by Basel II at only 20%, IKB needed only to have $2.4 million of capital, 1.6%, compared to the $12 million it would be required to have if lending that amount to unrated small and medium sized German companies.
If IKB had known that Paulson had had his hand in the picking, and known fully about his motives, then they might have asked for a slightly higher interest rate, maybe 10 basis points more, and still have bought the securities.
If the securities did not have the splendid credit ratings assigned to them by the credit rating agencies then they would probably not have bought them even if Mother Teresa had done the picking.
If the regulators had placed the same type of capital requirements on all assets then IKB would have stayed home, lending to their traditional clients, instead of going to California to dig prime rated subprime gold.
And so while naturally we should lend all our support to efforts to eliminate wrong-doings like those described in the SEC action against Goldman that should not signify we take our eyes of the unfortunate truth of having been saddled with grossly inept regulations, creating grossly bad regulations.
Now all of this does of course not imply that the Goldman Sachs, the Tourres, the Paulsons or the ACAs of this world are angels… it is just about putting it all in the right perspective.
IKB, a commercial bank headquartered in Germany did not use $150 million to lend to small and medium sized German companies, as they historically had done, but instead invested and lost “$50 million in Class A-1 notes at face value” and “$100 million in Class A-2 Notes at face value” in ABACUS 2007-AC1, exclusively because of the following two reasons:
First both tranches, the A1 paying Libor plus 85 basis points, and the A-2 paying Libor plus 110 basis, points were rated Aaa by Moody’s and AAA by S&P when purchased by IKB.
Second, in order to invest $150 million in these securities which because of their ratings were risk-weighted by Basel II at only 20%, IKB needed only to have $2.4 million of capital, 1.6%, compared to the $12 million it would be required to have if lending that amount to unrated small and medium sized German companies.
If IKB had known that Paulson had had his hand in the picking, and known fully about his motives, then they might have asked for a slightly higher interest rate, maybe 10 basis points more, and still have bought the securities.
If the securities did not have the splendid credit ratings assigned to them by the credit rating agencies then they would probably not have bought them even if Mother Teresa had done the picking.
If the regulators had placed the same type of capital requirements on all assets then IKB would have stayed home, lending to their traditional clients, instead of going to California to dig prime rated subprime gold.
And so while naturally we should lend all our support to efforts to eliminate wrong-doings like those described in the SEC action against Goldman that should not signify we take our eyes of the unfortunate truth of having been saddled with grossly inept regulations, creating grossly bad regulations.
Now all of this does of course not imply that the Goldman Sachs, the Tourres, the Paulsons or the ACAs of this world are angels… it is just about putting it all in the right perspective.
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